Chapter F: The transfer system

F2. Means testing

Key points

Means testing is an important tool for targeting government payments to those with most need and for managing the sustainability of the transfer system. It should continue to be used in the transfer system, but could be improved so that income and assets are more fairly assessed and incentives to work and save are strengthened.

Means testing is a key characteristic of Australia's unique transfer system, which is more highly targeted than other OECD countries. This high level of targeting is a strength of Australia's approach to income support that should be maintained. The concept of means for income support payments should include not only income but also the ability of a person to generate an income from their assets.

However, means testing can increase the level of complexity a person faces in interacting with the tax and transfer systems and can affect their incentives to work and save. Striking an appropriate balance between targeting based on need and maintaining incentives to work and save is a significant challenge in designing a means test.

Within the current two-part means test — the income test and the assets test — some assets are assessed under both tests, while other assets are assessed only under the assets test. This results in people receiving different levels of government payments even though they have the same level of wealth. This reduces the fairness of the means testing system.

A more uniform treatment of assets in the means test would reduce these outcomes and be more equitable. This could be achieved by having a comprehensive means test that determines access to all income support payments, including Newstart Allowance and the Age Pension. This means test would include deeming an income on most assets. The deeming rates would be based on the returns expected from a portfolio of assets that would be held by a prudent investor.

The comprehensive means test would provide a platform for tailoring the means test parameters such as free areas, withdrawal rates and earnings disregards to the circumstances of particular groups.

Family payments are in part paid to reduce the tax burden on those supporting dependent children, so it is more appropriate that the income base on which they are assessed is aligned with the taxation base. Taxable income on a family basis should therefore continue to be the sole means of determining a person's eligibility for these payments.